Annuities in Retirement: Pros and Cons – Should You Buy an Annuity?

So the other day a client of mine asked me,“Is an annuity right for me in terms of how it fits into my overall retirement income stream?” And the answer that question, as with manydifferent types of investments, is it totally depends. The first thing you need to do is understandwhat an annuity actually is. Typically it's a contract with an insurancecompany where you submit funds – you invest with the insurance company – and your fundswill accumulate over time. At some point the future, the insurance companywill start paying you out money for that investment income in the form of a lump sum or a seriesof payments over your lifetime – and typically.

People will receive a series of payments overtheir lifetime. So why an annuity might make sense for a portionof your retirement funds is to supplement other sources of income that you may alreadyhave – so pensions, Social Security, things like that. So in some respects that can be a very goodidea to help give you that guaranteed income stream, which is what a lot of us are looking for. Now there's two types of annuities. There's what are called fixed annuities andvariable annuities. Fixed annuities are basically what they sound:you invest your money.

The insurance company promises to pay youout 3 percent per year or 4 percent per year over the next 10 years, and then they payyou an income stream over the rest of your life. A variable annuity is a little different. You invest your money and then you have theability to put your money into different, what are called sub-accounts, and they’resort of like mutual funds within the insurance wrapper. One of the challenges with variable annuitiesis the fees inside the products can be extremely high inside of those separate accounts.

With fixed or variable annuities, one of thethings you absolutely want to be sure of is that you know what the commissions are ofthe agent that's selling you the product. So what I'd recommend if you're looking atan annuity, is A, work with a fee only financial advisor that's not earning commissions offof these products. Because then you know you're going to getthe right advice for you. Now back to variable annuities. Why they might make sense as they might giveyou a little bit of a better chance to outpace inflation because you're investing in market-typesecurities inside of the products. So now your money grows over time in a fixedor variable annuity, then you start to receive.

An income stream over, typically, what mightbe the rest of your life. Now some of the advantages of annuities: Number one, you cannot outlive the incomestream, typically. So if you live to 75 or 95 or 110 years old,that annuity stream continues to come in, so long as you're investing with a reputable,financially sound insurance company. So you want to check the ratings of the companythat you're investing with to make sure they're gonna be around in 10, 15, 20 years. So that's typically why people use them. One of the things you want to be aware ofis today, most insurance companies have what.

Are called riders on their variable annuityproducts. And what that means is it basically says thatyour money is going to be invested in these types of mutual funds and there's a guaranteebuilt in, in this column over here, that says that your money is guaranteed to grow forat least, let's say, 6 or 7 percent per year versus what the market does. So if I invest $100,000 over a 10 year period,this guaranteed 7 percent grows to $200,000. And then they're going to pay you out, forinstance, 5 percent per year over the rest of your life. Well, let's say for instance you invest at65 years old.

Your money grows for 10 years, and then itpays you out for another 20 years. So $200,000, five percent, that's gonna be$10,000 a year. It's going to take you 20 years just to getyour $200,000 back out of the product. So the point here is be aware of things thatsound too good to be true. Because if I could invest my clients moneyin a product that would guarantee them 7 percent per year while it was growing, and then 5percent per year while I was paying them out, I would put virtually all of my clients’money into it. It doesn't work that way, there's a lot ofsmoke and – smoke and mirrors, excuse me, as it relates to fixed and variable annuities.

So be cautious, beware. I would say one of the things I would absolutelywant to caution people is don't put all of your money into a fixed or variable annuity,but a portion of it might make a lot of sense. Beware of the commissions that are involvedand the fees you're paying inside the product as well. And then absolutely make sure you see a fee-onlyfinancial advisor that’s looking at your entire financial picture to give you the proper advice. For any further information on this topic,send us an email at

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